Credit-card debt is the most common financial sin, one that first-time users are prone to be guilty of, say experts.
Personal finance guru Suze Orman, speaking to journalists in the Philippines this month, said that those who can’t control their urge to spend are left with credit-card debts that they cannot pay. “Debt is bondage. You will never have financial freedom if you have bondage,” she said. The first law of money, the best-selling author added, “is to live below your means, but within your needs.”
However, today’s young people — and first-time card owners — may not be taught how to live within a budget, says David Rodger, chief executive of the UK-based NGO Debt Advice Foundation. “Young people are not being taught the basics of working out a personal budget; they are not being given the tools to help them understand their own financial position. And without this knowledge, they are more susceptible to unscrupulous marketers and struggle to deal with today’s complex and confusing financial landscape,” Rodger said in a statement.
GN Focus compiles some tips for young people to stay out of debt.
Research the charges thoroughly
Understanding how much banks charge — around 36 per cent per annum in interest in the UAE — will help you know the cost of delaying card payments or of only paying the interest every month. Eric Tyson, author of Personal Finance for Dummies, writes: “You might not intend to carry a balance. But before you agree to accept a card, understand all the terms and conditions because your situation might change... Stay away from ones with exorbitant fees and high late fees, even if the other features seem relatively attractive.” Rewards such as movie tickets and travel vouchers may seem enticing, but how much are you really paying for them? Focus on finding cards with the lowest fees and simplest terms.
Don’t use credit cards as a backup
People who do not live within their income occasionally use credit cards as a backup, according to a study of 2,005 British adults done in April by the comparison site MoneySupermarket.com. About 27 per cent of respondents said they used their credit card to tide them through difficult times. Turning to a credit card to get cash from an ATM is more expensive as cash-advance fees can be as much as 3 per cent of the total amount or Dh100 per transaction.
Don’t put vanities on your card
If you reward yourself with treats, don’t put these on your credit card unless you are sure you can pay for them at the end of the month, says Orman. “If you simply buffed your nails, you wouldn’t have to get a manicure more than once a month, because the only reason you go back is because your nail polish is chipped. I’m an extremely wealthy woman and you don’t see me with nail polish on because it’s so much time and money,” she said.
She believes emotional reasons drive credit-card debt. “Whenever you see somebody with credit-card debt, I already know it’s a self-esteem issue. You can’t fix a financial problem with money ever. You should first fix why a person spends more than they have. Until you fix that, they’ll just get into credit-card debt over and over again,” she said. Before buying anything, she added, cardholders should ask if it is a need or a want. “If it’s a want, walk away. If it’s a need, you buy it. If you live below your means... and purchasing only your needs and walking away from your wants, you will find money to save.”
Clear your debts each month
This is the most important bit of advice to credit-card owners and cannot be repeated enough. Paying your balance in full each month avoids costly interest charges and helps you stay within your means. In a study covering a single year in people’s personal finance lives, Finra Education Investment Foundation, a US financial literacy NGO, found that 45 per cent of men paid their credit-card balance in full each month, and only 39 per cent of women did the same. By Suze Orman’s definition, the rest could be defined as living in sin.
